The U.S. Department of Labor – Proposed Rule Addressing ESG Investment Selections by Fiduciaries – the Drama Continues As Agency Downplays Importance of ESG

By Hank Boerner – Chair & Chief Strategist – G&A Institute

August 9 2020

In the early 1970s, Congressional hearings featured allegations of abuses by managers of corporate pension funds taking actions to systemically deny men and women approaching retirement age their promised benefits.  A law was passed to protect plan beneficiariesThe Employee Retirement Income Security Act of 1974.

This was intended by the Congress of that day to create standards for private-sector plans to protect the financial and health of beneficiaries of corporate plans.

The U.S. Department of Labor was designated is the primary designated arm enforcing “ERISA”,  charged with “protecting the interests of employee benefit plans participants (workers) and their beneficiaries”.

Other agencies have plan oversight responsibilities as well – the U.S. Treasury Department (the IRS) and the Pension Benefit Guaranty Corporation (PBGC).

PBGC is like the FDIC protection for bank customers’ money; when a corporate pension plan fails, the PBGC assumes responsibility for providing retirement benefits to retirees. When a company with a retirement plan goes belly up, filing bankruptcy, or giving up responsibility for the plan, the PBGC takes over to help the plan’s beneficiaries (they don’t get all that was promised by the plan when it was managed by the company they worked for).

Among other elements of the ERISA law and operating rules, there are standards set for fiduciaries and managers of worker retirement plans and welfare benefit plans.

ERISA has been updated since passage 40+ years back and the DOL rules have changed over time.  So have related Internal Revenue Service rules.  In 1978 the Internal Revenue Code was amended to allow taxpayers to have a tax-deferred, defined, voluntary retirement plan of their own – the familiar 401 (k) plan that millions participate in.

In the latest summary from the DOL’s Employee Benefits Security Administration of DOL (“EBSA“) for FY 2013(!) — ERISA rules [then] applied to 684,000 retirement plans, 2.4 million health plans and 2.4 million additional welfare benefits.

These plans covered 140 million workers and beneficiaries – at the time, that was about half of the American workforce – and assets under management of the plans exceeded US$7 trillion.

To simplify what follows here, the rules adopted by federal regulators are intended to explain and enforce the statute passed by Congress – in this case, protection of worker rights and oversight of fiduciaries managing workers’ assets in plans.

There is a structured process for creating the enforcing agency rules-of-the-road for those organizations being overseen (for ERISA, fiduciaries, plan managers) and these rules could be changed from time-to-time and also be “interpreted” by regulators through communications intended to clarify the rules.

ESG Investment and the Department of Labor Perspectives

As “sustainable” or “ESG” investing became a preferred approach for individuals in plans and managers of plans, many more institutions and individuals preferred those investments, alongside or instead of more traditional investments.

Investors want to be able to invest in an ESG-themed mutual fund or ETF along with or instead of a traditional version that may track a benchmark of the same type.

Example:  There are many investment managers whose fund track the widely-used S&P 500 benchmark (from S&P Global) and investable products with an S&P 500 ESG benchmark.

State Street a few days ago launched an S&P 500 ESG Exchange Traded Fund (ETF) “to provide investors an opportunity to tap into ESG investing at the core of their portfolio” (with a very low expense ratio). This “EFIV” tracks the new S&P 500 ESG Index.

SSgA explains: “ESG investing is approaching a critical inflection point…the collective call for change is growing louder and investor increasingly taking a stand through their investment choices.”

How do the regulators of ERISA react to such progress?  To the call for change?  To respond to investors’ call for action?

By moving backward in rule-making with changes in rules to make it more difficult for plan managers and beneficiaries to invest in ESG vehicles.

To be sure, rules are subject to change. The DOL’s first guidance on ESG investment issues as issued back in 1994.

More recently, in 2008 (during the Administration of President George W. Bush) guidance appeared to be designed to restrict ESG investments by plan fiduciaries.

In 2015 (during the Administration of President Barack Obama) DOL guidance gave the green light to ESG investments…if the investment is appropriate based on economic considerations including those that may derive from ESG factors. (See our perspectives here from November 2015: http://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/)

And now in 2020, in June DOL’s EBSA proposed a “new investment duties rule” with “core additions” to the regulations.  (“Financial Factors in Selecting Plan Investments” — this to address “recent trends involving ESG investing”).

Among the comments of DOL that really wrankled the ESG investor universe:

  • New text was added to codify DOL’s “longstanding position” that plan fiduciaries must select investments based on financial considerations relevant to the risk-adjusted economic value of an investment (or “course of action”).
  • The reminder that “Loyalty” duty prohibits fiduciaries from subordinating interests of plan participants and beneficiaries to “non-pecuniary goals”.   ESG factors could be “pecuniary” factors — but only if they present economic risk/opportunity under generally-accepted investment theories.
  • New text was added on required investment analysis and documentation for the “rare circumstance” when fiduciaries are choosing among “truly economically-indistinguishable” investments.  (Huh?)
  • A provision that fiduciaries must consider “other” available investments to meet prudence and loyalty duties.
  • A new provision for selection of investment alternatives for 401-K plans describes what is required for “pursuing” one or more ESG-oriented objectives in the investment mandate (or include ESG “parameters” in the fund name).

DOL Comments On These:

“ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy…is to subordinate return or increase risk for the purpose of non-financial objectives.”  And

“Private [Sector] employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives…not in the interest of the plan…ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

After the rule changes were published, numerous investors pushed back – some summaries for you that were published on the 401K Specialist web platform of the responses of some fiduciaries who object to the proposed rule (“Commenters Hammer DOL of Proposed  ESG Rule”).

More than 1,500 comments have been submitted so far to DOL, calling for changes in the proposed rule, withdrawal, and the very short comment period (just 30 days, ended August 3, vs. the usual 90 days).

Investor/Fiduciary Pushback:

T. Rowe Price:   The proposed rule is attempting to solve a problem that does not exist. Worse, the proposed rule discourages fiduciaries from taking into account ESG factors that should be considered.

ICCR/Interfaith Center on Corporate Responsibility:  The rule would impose significant analytical and documentation burdens on fiduciaries of benefit plans governed by ERISA wishing to select (or allow individual account holders to select) investments that use ESG factors in investment analysis, or that provide ESG benefits (signed by 138 member institutions).

ESG Global Advisors: The Proposal has misunderstood and/or mischaracterized the nature and purpose of ESG integration…this is likely to lead to confusion for ERISA fiduciaries and additional costs to plan savers. Plan fiduciaries will struggle to fulfill their obligation to integrate all financially-material ESG risk factors into their investment process.

Morningstar: The Department’s rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections. The proposed rule would…erect barriers to considering ESG factors that many financial professionals consider as a routine part of investment management…

Voya Financial Inc.: The Proposal is fundamentally flawed for two reasons…among the many qualitative factors an ERISA fiduciary may appropriately consider…the Proposal singles out ESG factors and subjects them to special tests…second, the Proposal fails to account for the positive effect on investment behavior that the availability of ESG-focused investment options can have…

American Retirement Association: …appropriate investments that include ESG factors should not be prohibited from qualifying as Qualified Default Investment Alternatives (“QDIAs”)…

The Wagner Law Group:  The proposed amendment is inconsistent with existing law and guidance…it would require fiduciaries to only consider pecuniary factors instead of using their judgment and discretion to evaluate investments under the totality of circumstances…a narrow list of permissible factors is inconsistent with the notion that prudence is not determined by a checklist and is a fact-specific determination…

BlackRock:  …the Proposal creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially-material ESG factors…we urge DOL to engage with the industry to understand how investment options incorporating ESG factors are used in ERISA plans…

Members of Congress – the body that passed ERISA during its 93rd session in 1974 – reacted along partisan lines.

Republican members of the House Committee on Education and Labor submitted a letter of support of the DOL action.

Democrat Party members (41 of them) of the House and 20 members of the House Education and Labor Committee expressed opposition to the rule changes.

The Securities & Exchange Commission is looking at ESG investments as well – soliciting public comment “for the appropriate treatment for funds that use terms such as ESG in their name and whether the terms are likely to mislead investors” (also in the Federal Register post).

In May 2020 the SEC Investor Advisory Committee / Investor-as-Owner Subcommittee issued their perspectives on ESG disclosure:  https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf

There are more details for you here (the investor response summaries): https://401kspecialistmag.com/commenters-hammer-dol-on-proposed-esg-rule/

The Department of Labor’s EBSA proposal highlights are here as published in the Federal Register, June 30, 2020: http://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/

Notes:  The Secretary of Labor is Eugene Scalia, a nominee of President Donald Trump.

Acting Assistant Secretary for EBSA is Jeanne Klinefelter Wilson (appointed in June 2020).

There is an ERISA Advisory Council with six members.  Effective July 14, 2020:

  • Glenn Butash is chair; he is managing counsel at Nokia Corp.
  • David Kritz is vice-chair; he is deputy counsel at Norfolk Southern Corp.
  • John Harney is partner at law firm O’Donoghue and O’Donoghue.
  • Peter Wiedenbeck is Washington University School of Law professor.
  • James Haubrock is CPA and shareholder, Clark Schaefer Hackett.
  • Lisa Allen is compliance consultant, Altera Group.

Stay Tuned:  We will update you when decisions are announced by the Department of Labor.

Moving The World Forward Toward a More Sustainable Future: The Member Nations of the United Nations, Working Collaboratively For Progress in the 21st Century

by Hank Boerner – Chair & Chief Strategist – G&A Institute

“The United Nations” began as a World War II-era strategy as President Franklin D. Roosevelt talked about the allies of the United States of America partnering in the fight to save democracy and collectively battling the regimes of fascist dictators in Europe and Asia.

On January 1, 1942, 26 nations “united” in Washington DC to coordinate the battle with the “Axis” powers.  (“Axis” – the axis line, said President Roosevelt, ran from Berlin (Germany) through Rome (Italy) and to Tokyo (Japan) – the clear linkage in his mind of the fascist leadership.)

In February 1942 the president addressed the nation in his 20th “fireside chat” (broadcasting nationwide on “the radio”) to talk about the progress of the war.

The U.S. was coming from far behind in terms of preparedness for a global battle, and so an important part of the progress in this, the start of the first year of U.S. involvement in the global conflict, President Roosevelt explained to the nation of 125 million souls:

“The United Nations constitutes an association of independent peoples of equal dignity and equal importance. The United Nations are dedicated to a common cause. We share equally and with equal zeal the anguish and the awful sacrifices of war. In the partnership of our common enterprise, we must share in a unified plan in which all of us must play our several parts, each of us being equally indispensable and dependent one on the other.

“We have unified command and cooperation and comradeship. We of the United Nations are agreed on certain broad principles in the kind of peace we seek. The Atlantic Charter applies not only to the parts of the world that border the Atlantic [Ocean)] but to the whole world; disarmament of aggressors, self-determination of nations and peoples, and the four freedoms – freedom of speech, freedom of religion, freedom from want, and freedom from fear.”

The leader of the free world of that era envisioned an global organization that could bring about a new world ordering, to assure greater peace and prosperity to many peoples of the world.  President Franklin Roosevelt passed away in April 1945; soon the global conflict ended; and then what he long envisioned became the possible:

On October 24, 1945, 50 nations gathered in San Francisco to sign on to the “United Nations Conference on International Organizations” – and the UN as we know it today was launched.  (We celebrate UN Day on 24 October in commemoration of that historic event.)

Today the UN has 193 members – sovereign states that have equal representation in the UN General Assembly. The UN is the world’s largest intergovernmental organization – a forum for governments, not a world government.  And within the organization are important initiatives that have been shaping corporate responsibility, corporate citizenship, sustainability, and for capital markets, as well as for sustainable investing.  These are agencies, programs, institutes, global collaborations, and other entities.

You know some of them as the UN Principles for Responsible Investing (PRI); the UN Global Compact (UNGC); the UN Sustainable Development Goals (SDGs); the work of the UN Environmental Programme (UNEP).

Today we are hearing quite a bit in the corporate sector and in the capital markets about the Universal Declaration of Human Rights (adopted 1948); the UN has been the driving force behind 80-plus “human rights laws”.  Consider:  the declaration has been translated into 380 languages to date, says the UN High Commissioner for Human Rights..

We are sharing with you three recent highlights from the UN universe.   First, an update from the UNGC CEO Lisa Kingo, stressing that now is the time for society to invest in the 1.5C future…”there never has been a time”, she points out, “like today for coming together and jumpstarting a worldwide transformation towards a more inclusive and sustainable net-zero economy.”

Also from the UNGC, news of the launch of the Ocean Stewardship 2030 Report – to be a roadmap for how ocean-related industries and policymakers can jointly secure a healthy and productive ocean by 2030.

We are now in the Decade of Action on the Global Goals (the SDGs). The UNGC is an initiative of the UN Secretary General, a call to companies everywhere to align their operations and strategies with 10 universal principles focused on human rights, labor, environment and anti-corruption.

The Global Reporting Initiative (GRI) is today an independent global foundation that was birthed by the United Nations, building on the principles advanced for corporate responsibility by the NGO Ceres (based in Boston). An organization known for a philosophy of “constant improvement”, GRI recently organized an Agriculture and Fishing Project Working Group that will lead the work to create a new sustainability standard for ag & fishing.

This is part of the work of GRI’s New Sector Program – a multi-stakeholder group will move forward the initiative to help companies with ag and fishing in their value chains promote transparency and accountability, and better understand their role in sustainable development.

It’s almost 80 years now since President Franklin Delano Roosevelt – one of the most progressive leaders in U.S. history – conceived of the “united nations”, as a necessity to bring together the resources of other nations to fight a war on all of the continents, whose outcome was then uncertain.  And then to assure the peace and work to end wars, or at least settle disputes peacefully.

In November 2010 Secretary General Ban Ki-Moon noted:  “Sadly, FDR never saw the fruits of his efforts.  He died weeks before the founding conference. Yet his vision lives on in the UN Charter’s collective commitment to peace and security, economic and social welfare, tolerance and fundamental human rights.  Franklin Roosevelt’s Four Freedoms. This legacy of multilateral cooperation guides us today…”

Well said!

Top Stories

OOPS
In the June 8th issue of our newsletter (Highlights), with headline “Will We Ever See SEC Rules/Guidance for Corporate ESG Disclosure and Reporting?  The Question Hangs in the Wind..”  We incorrectly identified the corporate reporting regulations being reviewed by the Securities & Exchange Commission – should have said “Reg S-K” (not Reg F-D).  Sorry for the any confusion caused.  A more complete commentary on all of this is here on our blog.

Reporting and Disclosing Corporate ESG & Sustainability Results– Key Resources Roundup

By Kelly Mumford – Sustainability Reporting Analyst Intern – G&A Institute

Sustainability, Corporate Responsibility, and Environmental Social Governance (ESG) – these are some of the key buzz words circulating in capital markets’ circles that have become increasingly more important to both investors and corporate leaders as the risks of climate change to business organizations steadily increase.

We are now at the critical tipping point where it is necessary for all businesses to publicly report on and in various ways amply disclose how climate related risks — and related opportunities – and other issues such as Human Rights and Human Capital Management (HCM) might affect their business. And, to disclose what they are doing to address and mitigate such risks.

A recent institutional investor survey report by the Harvard Law School Forum on Corporate Governance that focused on ESG risk and opportunities found that investors recognize the growing risks of non-financial factors such as climate change, which is at the top of the agenda.

Climate change issues and human capital management were cited in the 2020 survey as the top sustainability topics that investors are focusing on when engaging with their boards.

Regardless of sector, all companies understand the importance of engaging with these topics. With that said, ESG and sustainability topics are playing a more concrete role in the private sector.

The good news is that there are significant resources available to help companies measure and report on sustainability and ESG, promote greater transparency, demonstrate better risk management, talk about improved performance, and in turn better promote the corporate brand value and reputation.

Such corporate disclosure and reporting have been shown to help to create higher shareholder returns and improve corporate economic performance.

With this in mind, standardized frameworks and indices are being used by corporations to provide more accurate and transparent information to their investors as well as all of their stakeholders.

However, as more diverse resources become available (examples are sustainability and responsibility frameworks, indices, and standards) there is also a need for distinctions to be made among them. To group all of these resources together would be inaccurate and misleading as each has unique advantages and distinction for both investors and corporate reporters.

Some of the key resources available in this space include: SASB, MSCI, Sustainalytics, Institutional Shareholder Services (ISS), Dow Jones Sustainability Index (the DJSI), TCFD, CDP, SDGs, and GRI.

To more easily understand their similarities and differences these can be grouped into broader categories. Such categories include: reporting standards, ESG ratings, indices, disclosure frameworks, investor surveys, and international goals. We’ll explain these in this commentary.

ABOUT CORPORATE REPORTING STANDARDS
The leading reporting standards present an effective way for companies to structure and publicly disclose “non- financial” information — such as strategies, actions, performance and outcomes for governance, environmental, and social impacts of the company. (That is, impacts affecting stakeholders, including investors.)

These important disclosures can be identified in the form of “sustainability, corporate responsibility, corporate citizenship” reporting.  Many such corporate reports explain how a company measures ESG performance, sets goals, and manages programs effectively – and then communicates their impact to stakeholders.

Reporting standards help to streamline the process of corporate reporting and allow stakeholders to better identify non-financial disclosures against widely used and accepted standards.

THE GLOBAL REPORTING INITIATIVE (GRI)
This is a long-established, independent organization (a foundation) that has helped to pioneer sustainability reporting. Since 1997 the organization has been working with the business sector and governments to help organizations (corporations, public sector and social sector organizations) communicate their impact and sustainability issues –such as climate change, human rights, governance and social well-being.

The current GRI sustainability reporting standards evolved out of four prior generations of frameworks dating to 1999-2000 (when the first reports were published, using “G1”) — and today is one of the most commonly-used with diverse multi stakeholder contributions to standards-setting.

GRI has been responsible for transforming sustainability reporting into a growing practice and today about 93% of the largest corporations report their sustainability performance using the GRI Standards.

  • Advantage of use for reporters: corporate reporting using the GRI standards helps to create consistent disclosures and facilitates engagement with stakeholders on existing and emerging sustainability issues. Further, use of GRI standards helps to create a more consistent and reliable landscape for sustainability reporting frameworks for both the reporters and their constituencies, especially including investors.

THE SUSTAINABILITY ACCOUNTING STANDARDS BOARD (SASB)
These more recent standards enable business leaders to identify, manage, and communicate financially-material sustainability information to investors. There are now 77 industry-specific standards (for 11 sectors) available for guidance.  These standards for an industry (and many companies are classified in more than one industry) help managers to identify the minimal set of financially-material sustainability topics and associated metrics for companies in each industry.

SASB standards help company managements to identify topics most relevant to their enterprise, and communicate sustainability data more efficiently and effectively for investors.

  • Can be used alone, with other reporting frameworks, or as part of an integrated reporting process. The G&A Institute team in assisting companies with their reporting activities use a hybrid approach, using both GRI and SASB as best practice.

 

ESG RATINGS/ DATA SUPPLIERS
A growing number of independent third-party providers have created ESG performance ratings, rankings and scores, resulting from assessment and measurements of corporate ESG performance over time against peers for investor clients. These ratings often form the basis of engagement and discussion between investors and companies on matters related to ESG performance.

There are several major ratings with varying methodology, scope, and coverage that are influencing the capital markets. Keep in mind there are numerous ESG data providers and ratings providing information to investors and stakeholders; however, for the scope of this post not all are mentioned.

INSTITUTIONAL SHAREHOLDER SERVICES (ISS) — ESG GOVERNANCE QUALITYSCORES(R)
ISS is a long-time provider of “corporate governance solutions” for institutional asset owners, their internal and external managers, and service providers. ISS provides a variety of ESG solutions for investors to implement responsible investment policies. The firm also provides climate change data and analytics and develops a Quality Score (for G, S and E) that provides research findings on corporate governance as well as social and environmental performance of publicly-traded global companies for its investor clients.

The ESG Governance QualityScore is described as a scoring and screening solution for investors to review the governance quality and risks of a publicly-traded company.

Scores are provided for the overall company and organized into four categories — covering Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight.

Many factors are included in this score but overall the foundation of scoring begins with corporate governance, the long-time specialty of this important provider.

  • ISS Advantage: as a leading provider of corporate governance, the ISS ESG Governance QualityScore leverages this firm’s deep knowledge across key capital markets. Further, these rankings are relative to an index and region to ensure that the rankings are relevant to the market that the public company operates in.

MSCI ESG RATINGS
MSCI has a specific ESG Index Framework designed to represent the performance of the most common ESG investment approaches by leveraging ESG criteria. Indexes are organized into three categories: integration, values, and impact.

MSCI also creates corporate ESG ratings by collecting data for each company based on 37 key ESG issues. AI methodology is used to increase precision and validate data as well as alternative data to minimize reliance on voluntary disclosure.

Consider:

  • MSCI is the largest provider of ESG ratings with over 1,500 equity and fixed-income ESG Indexes. The firm provides ESG ratings for over 7,500 global companies and more than 650,000 equity and fixed-income securities (as of October 2019).
  • Advantages for investors: Focuses on intersection between a company’s core business and industry-specific issues that can create risks and opportunities. ESG ratings gives companies a rated score of AAA-to-CCC, which are relative to industry peers. Companies are rated according to their exposure to risk and how well they manage risks relative to peers. Companies are analyzed on calendar year basis and are able to respond to the profile developed for investors by MSCI analysts.

SUSTAINALYTICS
This organization rates sustainability of exchange-listed companies based on environmental, social, and corporate governance (ESG) performance. The focus is on ESG and corporate governance research and ratings.

What makes them unique: their ESG Risk Ratings are designed to help investors identify and understand material ESG risks at the security and the portfolio level.

The corporate ESG risk rating is calculated by assessing the amount of unmanaged risk for each material ESG issue that is examined. The issues are analyzed varying by industry and depending on industry, a weight is given to each ESG issue.

  • Key: The assessment focuses on most material risks, using a two-dimensional lens to assess what risks the corporation faces and how well leadership manages the identified risks. Absolute ratings enable comparability across industries and companies for investors; corporate governance ratings are integrated into the ESG risk rating, and controversy research is also considered for the risk ratings. The performance is based on both quantitative metrics and an assessment of controversial incidents, allowing for the complete picture to be demonstrated with the ESG ranking.
  • Unique point: Total ESG risk score is also presented as a percentile so it can be compared across industries. This allows for a better understanding of how the industry performs as a whole, so to better assess how well a company is performing relatively.

SOME OF THE LEADING INDICES
Indexes / benchmarks help to make capital markets more accessible, credible, and products or approaches better structured for investors. They allow for performance benchmarks to represent how equity and/or fixed-income securities are performing against peers.

Specialized ESG indices specifically have been gaining in favor over the recent years as investors become more interested in responsible / sustainable investing. This out-performance is evident in the time of the coronavirus crisis with ESG funds inflow exceeding outflow of traditional indexes. Investors see this as a sign of resilience and excellence in risk performance for ESG companies.

It is evident that ESG index funds have been outperforming key core indexes — such as the S&P 500 Index(r). (The new S&P 500 ESG Index has been outperforming the long-established sister fund.)

Also, the growing abundance of ESG data and research has helped to promote the development and embrace of corporate ESG ratings, which in turn allows for the construction of even more such indices.

Because these indexes represent the performance of securities in terms of ESG criteria relative to their peers, it helps define the ESG market and availability of sustainable investing options.

There are now numerous ESG Indices available to investors – to cover them all that would require another blog post. So, for the sake of this brief post only DJSI is mentioned, as it is one of the mostly widely-known and frequently used by global investors.

DOW JONES SUSTAINABILITY INDICES (DJSI)
This is a family of indices evaluating the sustainability performance of thousands of publicly-traded companies. DJSI tracks the ESG performance of the world’s leading companies in terms of critical economic, environmental, and social criteria. These are important benchmarks for investors who recognize that corporate sustainable practices create shareholder value. The indexes were created jointly with Dow Jones Indexes, and SAM, now a division of S&P Global Ratings (which owns the DJSI).

  • This was the first global sustainability index – created in 1999 by SAM (Sustainable Asset Management of Switzerland) and Dow Jones Indices. Today, owned and managed by S&P Global Ratings.
  • Advantage for investors: Combines the experience of an established index provider with the expertise of a sustainable investing analytics to select most sustainable companies for the indexes from across 61 industries. Calculated in price and total return disseminated in real time. This is an important benchmark for many financial institutions.
  • Selection process is based on companies’ total sustainability score from annual SAM Corporate Sustainability Assessment (the important CSA that results in the corporate profile). All industries are included, and the top 10% (for global indices, top 20% for regional indices, and top 30% for country indices) of companies per industry are selected

CORPORATE DISCLOSURE FRAMEWORKS
Disclosure frameworks are used to improve the effectiveness of financial disclosures by facilitating clear communication about certain criteria. There are long-standing frameworks such as created by the Financial Accounting Standards Board (FASB) that establish standards for U.S. corporate financial accounting.

Similarly, there is now a suggested disclosure framework related to the corporation’s financial information but that focuses on climate related risks and opportunities — the Financial Stability Boards’ “Taskforce on Climate-related Financial Disclosures” — or TCFD. (The FSB is an organization of the G20 countries; member participants are the securities and financial services administrators and central bankers of the largest economies.  The U.S. members include SEC, the Federal Reserve System and the Treasury Department.  The FSB considers future regulations that could be considered in the member countries.)

As the capital markets players interest in corporate sustainability and ESG grows, and public policy makers recognize the threat of many ESG issues to the health of their nations, it is not surprising that there would be a specific resource developed for corporate climate-related financial disclosures.

Investors have a heightened awareness of the risks that climate change issues poses to their holdings, so it is now considered to be a best practice for company managements to report and disclose on these risks and responses to address them – using among other resources the TCFD recommendations for disclosure.  Here is what you need to know:

TASKFORCE ON CLIMATE RELATED FINANCIAL DISCLOSURES (TCFD)
Developed by the Financial Stability Board (FSB) to encourage voluntary, consistent, climate related financial disclosures that could be useful to investors. N.Y.C. Mayor/Bloomberg LP founder Michael Bloomberg serves as the chairman and founder of the task force (which has a 32-member board).

The “TCFD” recommendations for corporate disclosure are intended to help both publicly-traded companies and investors consider the risks and opportunities associated with the challenges of climate change and what constitutes effective disclosures across industries and sectors.

This approach enables users of financial information to better assess risk and helps to promote better corporate disclosure. The recommendations call for disclosure around four core areas — governance, strategy, risk management, and metrics and targets.

To keep in mind:

  • The initial recommendations applied to four financial sector organizations (bankers, insurers, asset owners, asset managers). And to four industry categories – oil & gas; food & agriculture; transport; building materials and management.
  • Advantage for companies: following the TCFD recommendations represents an opportunity for companies following the recommendations to bring climate-related financial reporting to a wider audience.

INVESTOR-FOCUSED SURVEYS – CORPORATE RESPONSES
Investor interest surveys — such as those conducted by CDP – can provide an advantage for companies in responding to disclose important ESG data and take part in the movement towards building a carbon-neutral economy.

The information provided to CDP by companies makes up the most comprehensive dataset tracking global climate progress. Investors use these volumes of data on climate change, deforestation, supply chain management and water security to inform decision-making, engage with companies, and identify risks and opportunities.

Corporate response to the annual, global surveys benefits investors and provides companies with ways to inform investor engagement strategies.

CDP
Established by investors 20 years ago as the Carbon Disclosure Project, CDP today is an organization that supports the movement of cities and companies toward greater measurement, management and disclosure of key data and information to promote a carbon neutral economy.

These data helps to manage risks and opportunities associated with climate change, water security and deforestation. More than 2,000 companies in North America and 8,000 globally disclose data through CDP.

Disclosure is key, not only for measuring impact but also for setting goals and targets that enable climate action. CDP has been at the forefront of the disclosure movement to track and measure global progress towards building a more sustainable world.

  • Advantage: reporting to CDP is advantageous because it helps companies get ahead of regulatory and policy changes, identify certain ESG risks, and find new opportunities to manage those risks in a way that is beneficial for both business — and the planet.
  • TCFD Connection: The CDP response questions have been aligned with the TCFD and a good comprehensive CDP response can provide a baseline for a majority of the necessary disclosures for TCFD.

INTERNATIONAL GOALS – THE SUSTAINABLE DEVELOPMENT GOALS (SDGS)
The United Nations Sustainable Development Goals are unique in that they are a set of widely-accepted international goals. Countries, cities, and companies all over the world and use these goals as a way to inform and inspire action on sustainable development goals. The goals are very broad in aims so it allows for parties to adapt and use the goals that are most relevant. They are non-binding and therefore their implementation depends on local government or corporate polices to be upheld.

These are a United Nations-developed plan to [among the goals] end extreme poverty, reduce inequality, and protect the planet. The SDGs succeeded the Millennium Goals (2000-to-2015) and extend collaborative and independent action out to year 2030 by public, private and social sector organizations.  The goals (17 in all with 169 underlying targets) have been adopted by 193 countries and emerged as a result of the most comprehensive multi-party negotiations in the history of the United Nations.

The SDGs focus on ways to generate impact and improve the lives of all people. The goals are related to themes such as water, energy, climate, oceans, urbanization, transport, and science and technology.

  • The SDGs are not focused on any sector or stakeholder in specific. Instead they serve as a general guidance that can be used at any level.
  • Distinctions: as one of the most widely recognized frameworks for corporate consideration, companies and stakeholders can use the Goals as a way to guide their sustainability initiatives. Many companies recognize them in corporate reports and many align certain aspects of their mission to relevant SDGs.

# # #

AUTHOR’S CONCLUSION
As asset owners and asset managers now expect – and demand – greater corporate disclosure on climate change-related topics and issues, there are numerous resources available for managers to create and inform comprehensive, compelling reports for public access.

It is up to company leaders to identify the category of resources that would best benefit them, whether that be aligning with a disclosure framework, answering a CDP survey, or using ESG ratings. Most leading companies are taking a hybrid approach and utilizing the best features of the most common frameworks to maximize the ROI of their investments in this area.  We’ve identified some of the most-utilized here but there are still many more resources available in each category depending on industry, sector, geography, nature of the business, and other factors.

While the large universe and diversity of sustainability and ESG disclosure and reporting resources might be confusing to make sense of, it is increasingly obvious that investors are relying on ESG factors when making decisions and that the importance of climate change is only growing.

The team at Governance & Accountability Institute are experts in helping corporate clients work with the frameworks, etc. profiled here.  I serve as a reporting analyst-intern at, reviewing literally dozens of corporate sustainability / ESG / citizenship – responsibility – citizenship et al reports each month.

ABOUT KELLY MUMFORD 
Kelly Mumford is a graduate of the Development Planning Unit at the University College London. She graduated with a Master’s of Science in Environment and Sustainable Development (with Merit). Her course focused on environmental planning and management in developing countries and culminated with a month of field work in Freetown, Sierra Leone. She led a group during their research on the water and sanitation practices of a coastal community in the city of Freetown. Her work in preparation for this fieldwork includes a policy brief, published by their partner research organization.

Kelly has been very active in the environmental sector and prior to this interned at Natural Resources Defense Council. She holds a Sustainability Associate Credential from the International Society of Sustainability Professionals and has been an active member of the organization, planning and executing a successful N.Y.C. chapter’s whale watching event. She holds a B.A. in Environmental Studies and a minor in Spanish studies from the University of Delaware. She plans to pursue a career in sustainability, focusing on ESG and leveraging her research experience and knowledge of sustainability reporting.

ADDITIONAL RESOURCES

Will We Ever See SEC Rules / Guidance For Corporate ESG Disclosure and Reporting? The Question Hangs in the Wind…

by Hank Boerner – Chair & Chief Strategist – G&A Institute

People have questions about corporate sustainability / ESG / responsibility / citizenship disclosure and reporting.  Such reporting has been on a hockey stick rise in recent years.

Should ESG/sustainability etc reporting be regulated?  How? What would be regulated in terms of disclosure and reporting – what should the guidelines for corporate issuers be?  Does this topic become a more important part of the SEC’s ongoing Reg S-K (disclosure) revamping? What information do investors want?  What do companies want to have covered by regulation?  Many questions!

Some answers are coming in the European Union for both issuers and investors with new and proposed regulations.

And in the main will have to come in the U.S.A. from the Securities & Exchange Commission — at some point.

SEC was created with the adoption of the Securities Exchange Act of 1934.  The agency was specifically created by the U.S. Congress to oversee behaviors in the securities and markets and the conduct of financial professionals.

Publicly-traded company reporting oversight is also an important part of the SEC mission. The 1933 and 1934 acts and other subsequent legislation (all providing statutory authority for rulemaking and oversight) provide the essential framework for SEC to do its work.

As Investopedia explains for us, the purpose of the 1934 act is “to ensure an environment of fairness and investor confidence.”  The ’34 act gave SEC broad authority to regulate all aspects of the securities industry and to enforce corporate reporting by companies with more than US$10 million in assets and shares held by 500 or more shareowners.

An important part of the ongoing SEC’s mission, we should say here, is to protect investors and be open to suggestions “from the protected” to improve the complicated regimes that guide corporate disclosure. So that investors have the information they need to make buy-sell-hold decisions.  Which brings us to S-K.

In recent months, the SEC staff has been working on the steps to reform and updates segments of Reg S-K and has been receiving many communications from investors to suggest reforms, updates, expansion of, corporate disclosure.  (Details are below in the news release from SEC in 2019. The SEC proposed rule changes, still in debate, are intended to “update rules” and “improve disclosures” for investors and “simplify compliance efforts for companies”.)

Regulation S-K provides standard instruction for filing forms required under the 1933 and 1934 acts and the Energy Policy and Conservation Act of 1975.

Especially important in the ongoing initiative to update Reg S-K, we believe:  the setting out for SEC staff and commissioners of facts and perspectives so that serious consideration is given to the dramatic sea changes in (1) the growth of sustainable investing and the related information needs; (2)  and, the vigorous corporate response, particularly in the form of substantial sustainability / ESG reports issued.

Most of the corporate reports published in recent years have been focused on the recommended disclosures as advanced by popular frameworks and widely-recognized reporting standards (such as those of GRI, SASB, CDP, TCFD, et al).

Will we see SEC action on S-K rules reform that will draw applause from the sustainable investors? Now, we point out, including such mainstream players as BlackRock, State Street and Vanguard Funds, to name but a few owners found in almost every corporate top holder list.

Ah, Depends.  Political winds have driven changes in rules at SEC. Then again, it is an election year.  (To be kept in mind:  There are five SEC commission members; two are appointed and confirmed Democrats, two are Republicans – and the chair is nominated by the president…right now, a Republican holds that position.)

Investor input is and should be an important part of SEC rule making. (All of the steps taken by the Commission to address such items as corporate disclosure and reporting in adopting or amending the rules have to follow the various statutes passed by the congress related to the issue.  Investor and stakeholder input is an important part of the approach to rule-making.  Sustainable investing advocates have been making their views abundantly clear in this initiative to update Reg S-K.)

The SEC Investor Advisory Committee formally makes recommendations to the agency to help staff and commissioners be aware of investor sentiment and help to guide the process through the advice provided.

Recently the committee voted to make recommendations to the SEC on three topics: (1) accounting and financial disclosure; (2) disclosure effectiveness; and, (3) ESG disclosure.

The committee said they decided that after 50 years of discussion on ESG disclosure it is time to make a move, now that ESG / sustainability are recognizably important factors in investing.  Given the current political environment in Washington, there probably won’t be much movement at SEC on the issue, many experts agree.

But the marker has been strongly set down in the committee’s recent report, one of numerous markers set down by sustainable investment champions.  

Commissioner Hester M. Pierce addressed the Investor Advisory Committee, and shared her perspectives on ESG reporting.  “The ambiguity has made the ESG debate a difficult one…”  She thinks “the call to develop a new ESG reporting regime…may not be helpful right now…”  (She is a Republican nominee, a lawyer in academia.)

We have included her comments in the selection of four Top Stories for you.  Another of the items – the comments of SEC Chair Jay Clayton along the same lines about ambiguity and confusion of ratings etc. (he is also a Republican appointee).

To which sustainable investing proponents might say – if not now, when, SEC commissioners!

While the conversation may at times be focused on “what do investors want,” there is also wide agreement among corporate boards and executives that guidance and standardization in corporate ESG / sustainability et al reporting would be very helpful.

With the current comments of the leadership of SEC we are not quite there yet.

Interesting footnote:  The October 1929 stock market crash helped to plunge the nation into the Great Depression.  The 1932 presidential elections resulted in New York Governor Franklin Delano Roosevelt (a Democrat) moving to the White House in March 1933 and swiftly taking action to address important public policy issues.  He brought him his “brains trust”, experts in various public policy issues that helped to create sweeping reforms and creation of powerful regulatory agencies — such as the SEC.

The story goes that there was so much to do that the financial markets and corporate oversight legislation had to be divided into two congressional sessions – in 1933 and 1934 (the congress met for shorter periods in those days – the members were part-timers).  Thus, the Securities Act of 1933 and the 1934 act.

Regulation overall was then and today is a very complicated topic!

Top Stories

SEC’s Investor Advisory Committee Makes Disclosure Recommendations  (Source: Cooley PubCo)

SEC Chair Warns of Risks Tied to ESG Ratings 
(Source:  Financial Times)

In addition, see:

SEC Provides Public Companies with COVID-19 Filing Deadline Relief and Guidance on the Financial Reporting Effects of the Virus

Summary of Audit Committee and Auditor Oversight Update (No. 58 February-March 2020)

by Daniel L. GoelzerFellow, G&A Institute

As companies struggle with the uncertainties and disruptions of the COVID-19 pandemic, the Securities & Exchange Commission (SEC) has taken steps to assist public companies in complying with their reporting and disclosure obligations. The SEC has issued orders that extend for 45 days the deadline for most public company filings due between March 1st and July 1st, although companies that wish to take advantage of this relief must comply with certain conditions.

In addition, the Division of Corporation Finance had issued guidance providing staff views on disclosure and other securities law issues arising from COVID-19 and related business and market disruptions.

SEC Exempts More Small Companies from ICFR Audits

On March 12, the SEC adopted amendments to the definitions of the terms “accelerated filer” and “large accelerated filer”.

The effect of these amendments is to exclude certain smaller public companies from accelerated filer status. As a result, these companies will no longer be required to obtain an auditor’s report on the effectiveness of their internal control over financial reporting and will have additional time to file annual and periodic reports with the SEC.

Companies that qualify as smaller reporting companies under the Commission’s rules and have less than $100 million in revenue will move from accelerated filer to nonaccelerated filer status.

Managements and audit committees of companies affected by these amendments should consider whether or not discontinuing the ICFR audit is cost-effective.

Internal Auditors Are Missing Key Risks

The Institute of Internal Auditors (IIA) has released its annual survey of Chief Audit Executives. The 2020 North American Pulse of Internal Audit “reveals serious gaps in internal audit’s coverage, with audit plans deficient in key risk areas.”

For example, the IAA found that almost one-third of respondents did not include cybersecurity/information technology in their audit plans. In addition, more than half did not include governance/culture or third-party relationships, and 90 percent did not include sustainability.

Audit committees should consider whether the internal audit staff’s plans for the coming year match the committee’s view of risk.

What’s on the Audit Committee’s Agenda in 2020?

Part II: COVID-19

During the past month, COVID-19 has radically altered public company priorities and challenges. This Update summarizes the views of three large accounting firms on the financial reporting issues that companies – and therefore audit committees — will face in the new environment.

Deloitte Perspectives

In Financial Reporting Considerations Related to COVID-19 and an Economic Downturn (March 25, 2020), Deloitte discusses key accounting and financial reporting considerations related to economic conditions that may result from the COVID-19 pandemic.

Deloitte’s comprehensive 64-page analysis includes the following sections:

  • Select SEC and PCAOB Announcements Related to COVID-19,
  • SEC Reporting and Disclosure Considerations, Broad Financial Reporting and Accounting Considerations, Internal Control Considerations, and
  • Financial Reporting Under ASC 852 for Entities in Reorganization Under the Bankruptcy Code.

The Deloitte paper also includes an appendix with industry-specific insights for eleven industry sectors. The executive summary discusses six accounting and reporting issues that “will be the most pervasive and challenging as a result of the pandemic’s impact.”

PwC’s Perspectives

PwC’s Responding to COVID-19: Considerations for corporate boards (March 20, 2020) states that boards “need to be proactive and agile, and they need to respond with strong leadership.” Accordingly, boards “will want to immediately consider” four broad issues:

  • Business (e.g., employee well-being,impact on strategy, share repurchases and dividends,supply chain,and liquidity);
  • tax policy and Washington;
  • financial reporting (e.g., financial reporting operations, earnings guidance, judgments and estimates, revenue recognition, and internal control testing);
  • and governance.

In a second publication — 1 2020 Audit committee newsletter: Helping you prepare for your next meeting — PwC adds some points specifically for audit committees.

E&Y Perspectives

In Five Financial Reporting Issues to Consider as a Consequence of COVID-19 (March 23, 2020), EY acknowledges that “the impact on financial reporting may not be the first thing that comes to mind as a consequence of the outbreak.”

Nonetheless, “there is an important and challenging role here for preparers of financial statements, audit committees and auditors.”

EY states that five issues will be priorities: Going concern and liquidity, impairment assessment, contract modifications, fair value measurement, and government assistance and income tax.

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Daniel Goelzer is a retired partner in the law firm of Baker McKenzie. He is a member of the Sustainability Accounting Standards Board and advises a Big Four accounting firm on audit quality issues. From 2002 to 2012, he was a member of the Public Company Accounting Oversight Board and served as Acting PCAOB Chair from August 2009 through January 2011. From 1983 to 1990, he was General Counsel of the Securities and Exchange Commission. Mr. Goelzer is a CPA and a lawyer.

He is a G&A Institute Fellow. 

You can follow the Audit Blog:  @BlogAuditor on Twitter or @the-audit-blog on medium.com

Nasdaq Supports Crisis Relief Organizations, Makes Commitment to Clients

March 25, 2020  #6 in the series

by Hank Boerner – Chair & Chief Strategist – G&A Institute and the G&A team — continuing the conversation about corporate and investor response to the coronavirus crisis.

We are going to post the individual organization’s actions for ease of reference for our readers.

See the first post in the queue for details about this series.

* * * * * * * * 

NASDAQ Supports Relief Organizations, Makes Commitment to Clients

Nasdaq CEO Adena Friedman notes: “As a responsible corporate citizen, we strongly believe Nasdaq can contribute in important ways to support our communities as we manage through these challenging times together.

“This means support government authorities and global health organizations in their response efforts, increasing our philanthropic support to organizations focused on supporting small businesses, and providing funds to groups working tirelessly on the front lines of this pandemic to keep our communities safe.”

Walking the Talk: Cash and in-kind donations (US$6 million) are being provided, with $5 million cash in these commitments:

  • Opportunity Fund’s Small Business Relief Fund to support small business owners;
  • the World Kitchen’s #ChefsForAmerica relief efforts to provide meals to students, seniors, vulnerable communities;
  • World Health Organization’s COVID-19 Solidarity Response Fund to help front-line health workers and their patients to get essential supplies and to accelerate efforts to develop vaccines, tests and treatments.
  • The Greater New York Hospital Association is receiving 12,000 face masks from Nasdaq and the firm’s clients, partners and vendors are encouraged to donate more.
  • Nasdaq employee contributions to global COVID-19 relief/response efforts are being double matched through the Nasdaq GoodWorks program. Info at: https://www.nasdaq.com/GoodWorks
  • Employees are now volunteering “virtually” as part of the effort to keep employees and partners’ employee safe in the crisis.
  • An estimated $1 million in advertising time on the Nasdaq MarketSite Tower in New York City’s Times Square has been reserved for PSAs (public service announcements) related to the concept of “social distancing” (stay away from each other!) and efforts to #flattenthecurve.
  • And – corporate clients’ philanthropic and PSAs will be included in Nasdaq campaigns (such as in outdoor advertising, social media, digital campaigns).

Important: All Nasdaq operations – products – services will remain operational through the global remote workforce and splitting of team deemed to be essential for the on-site staff.

The company is asking for U.S. Securities & Exchange Commission (its regulator) permission to suspend price-based and shareholder equity rules for listed companies to give those public companies breathing room to adjust to the crisis — and for other adjustments.

Nasdaq is one of the world’s leading global technology companies, serving the global capital markets with data, analytics, software and a range of services. 120 market operators are served globally.

* * * * * * * *

Bravo, Nasdaq team – and thank you for your efforts. We are all looking forward to the recovery and upward bound quotations on the Nasdaq global platforms on the post-crisis period.

* * * * * * * *

G&A Institute Team Note:
We continue to bring you news of private (corporate and business), public and social sector developments as organizations in the three societal sectors adjust to the emergency.

The new items will be posted at the top of the blog post and the items today will move down the queue.

We created the tag “Corporate Purpose – Virus Crisis” for this continuing series – and the hashtag #WeRise2FightCOVID-19 for our Twitter posts.  Join the conversation and contribute your views and news — info@ga-institute.com.

NASDAQ Exchange Publishes the “ESG Reporting Guide” for Corporate Managements and Boards

by Hank Boerner – Chair and Chief Strategist, G&A Institute

There is encouraging news for sustainability professionals coming from the world of stock exchanges this month.  The NASDAQ Exchange just published its guide for listed companies – as well for privately-owned firms as perhaps future IPOs for NASDAQ listing – for companies’ public ESG reporting. 

This is the ESG Reporting Guide – A Voluntary Support Program for Companies”.

The pilot program for the guide effort got underway with NASDAQ’s Nordic and Baltic markets in 2017; the May 2019 guide includes third party reporting methodologies for company leaders’ education. 

The recommendations are “completely voluntary” for companies, the exchange emphasizes. Evan Harvey is the Global Head of Sustainability for NASDAQ and key player in development of the guide.

As the corporate ESG reporting pace continues to increase in both volume and velocity, company boards and managements do need more guidance on evolving ESG / sustainability standards and frameworks that could be used [for their increased disclosure and structured reports such as those published annually or periodically for their investors]. 

These frameworks, NASDAQ explains, include the Global Reporting Initiative Standards, (GRI); the standards of the Sustainable Accounting Standards Board (SASB) for 79 industries; the TCFD recommendations (the work of the FSB’s Task Force on Climate-Related for Financial Disclosures); and (as example) the guidance and frameworks for industry reporting such as GRESB for the real estate industry. Note: G&A Institute is the Data Partner for the GRI in the U.S.A., U.K. and Republic of Ireland.

The NASDAQ guide developed along the lines of such ESG / sustainability reporting “being voluntary” by private sector companies underscores that we are yet not quite at the “order to publish” from the United States stock exchanges.

Halfway ‘round the world, the Hong Kong and Singapore stock exchanges set the pace with such listed company rules.  In Hong Kong, listed companies must “comply or explain” for their ESG reporting; in Singapore, the rule is to publish the annual corporate sustainability report after 1/1/17 – also on comply or explain basis.

And in Europe, companies larger than certain market caps and employee counts must report on their CR activities; (“The European Directive of Non-Financial and Diversity Information by Certain Large Companies”, part of the EU’s Initiative of CSR.)

Getting to a “listed rule requirement” that exchange-listed companies must publish an annual or more frequent corporate sustainability report is a heavy lift in the U.S. capital markets, which typically reflect the direction of the political winds in Washington D.C. and the opinions within the corporate community. (Such as: this type of reporting means more work and expense.)

Right now, the chair of the SEC – the regulator of both the stock exchanges and publicly-traded companies – is a Republican and two other members of the five-member Commission are “Rs”.  Their party’s leader in the White House is busily dismantling environmental protection and other rules and pulling the U.S. out of the historic Paris Agreement on climate change.

Background:  The regulatory activities of the stock exchanges based in the United States are governed by statutes passed by the U.S. Congress (such as the Securities Act of 1933 and Exchange Act of 1934) and the stock exchanges therefore by federal law are designated as non-governmental “self-regulating organizations” or SROs. 

As SROs, the New York Stock Exchange and NASDAQ Exchange have certain authority to establish rules and regulations and set standards for companies (“issuers”) whose stock is listed for trading on their exchange.  Of course, the views of the listed company leaders and other stakeholders are considered when rules are being developed.

Proposed listing company or brokerage (“member”) rules are filed with the Securities & Exchange Commission (created by that 1934 law) to oversee and regulate certain activities. And so, the proposed rules for listed companies, brokerage firms and other entities are filed with SEC and public comment invited before SEC approval and then the exchange’s official adoption of the Rule.  

A recent NASDAQ SEC filing example is: “Notice of Filing of Proposed Rule to Adopt Additional Requirements for Listings in Connection with an Offering Under Regulation A of the Securities Act” in April 2019.

Should the U.S. exchanges adopt rules requiring corporate ESG reporting?  Could they?  Will they? Will SEC review and approve such rules for exchange-listed firms?  These are important questions for our times.  Of course, many people are “Staying Tuned!”

An important P.S.: The 1934 Act also ordered publicly traded companies to file annual and other periodic reports.  In the 1970s, the NYSE listing rules required listed companies to begin publishing quarterly reports; some of the listed companies reacted with great alarm. 

But shortly afterward the SEC made this a requirement for all listed companies. And so the familiar 10-K, 10-Q etc.  This extends to non-US companies raising capital in the U.S. such as listing their securities on an American exchange.

Note from Hank Boerner: This writer once served as the NYSE’s head of communications and as the Exchange’s advisor to listed company investor relations, corporate secretaries and corporate communicators on things like timely disclosure and related topics.

Our announcement of [new] listed company rules calling for quarterly corporate reporting and other reforms was quickly greeted by many more jeers than welcoming cheers! But today, quarterly reporting is a settled matter. One day, we may see the same for corporate sustainability reporting.

Click here to find out more about Hong Kong and Singapore exchange rules.

NASDAQ, NYSE, Hong Kong, Singapore – all are participating in the World Federation of Stock Exchanges (WFE) Principles to exert leadership in promoting a sustainable finance agenda. Those principles are explained in the report here.

This Week’s Top Stories

Nasdaq Launches Global Environmental, Social And Governance (ESG) Reporting Guide For Companies
(Thursday – May 23, 2019) Source: NASDAQ – Nasdaq (Nasdaq: NDAQ) has announced the launch of its new global environmental, social and governance (ESG) reporting guide to support public and private companies. The 2019 ESG Reporting Guide includes the latest… 

More information is available at: https://business.nasdaq.com/esg-guide

1st in Series: The Software / IT Services Industry – GRI & SASB Standards In Focus – Perspectives on Alignments & Differences

SERIES INTRODUCTION 
GRI & SASB In Focus – Perspectives on Alignments & Differences

Notes from the G&A Institute Team on the series of commentaries by members of the G&A Sustainability Report Analyst Interns…

With the recent publication of the much-anticipated “Report on US Sustainable, Responsible and Impact Investing Trends 2018” issued by US SIF showing that ESG has really hit the capital markets’ mainstream — with $1-in-$4 in the US (by professional investment managers now incorporating ESG).  And, with the recent petition urging mandatory ESG reporting — submitted to the Securities & Exchange Commission by institutional investors  — he need to develop a more standardized framework for corporate ESG reporting is more pressing than ever before.

A recent discussion paper — “Investor Agenda For Corporate ESG Reporting” — with inputs from the CFA Institute, ICGN, PRI, CERES, GSIA, GIIN, and the UNEP-FI — further highlights this issue.

Among other things, the discussion paper emphasizes the need for participants of the Corporate Reporting Dialogue (participants include reporting standard setters – GRI, SASB, CDP, IIRC,CDSB, ISO, FASB, and IFRS) to deliver on their promise to work together to develop a more unified agenda on ESG reporting.

As part of our company’s role as the GRI Data Partner in the USA, UK and Republic of Ireland, G&A Institute’s Sustainability Report Analyst-Interns analyze thousands of sustainability reports each year and contribute the information to the GRI’s Sustainability Disclosure Database. This is the largest publicly-accessible sustainability disclosure database in the world (with now over 50,000 sustainability reports included, dating back to the start of the GRI).

Many of the corporate reports the G&A analysts process use the GRI Standards — and a number have now started to implement aspects of the SASB Standards as well in their disclosure and reporting process, depending on their sector and industry categories.

In their ongoing work, G&A’s Sustainability Report Analyst-Interns have been comparing the two standards for disclosure in specific industries as they carefully examine the corporate reports, and consider two standards’ alignment, similarities and differences.

In this series G&A’s Sustainability Report Analyst-Interns share their own perspectives as they have analyzed reports and noticed similarities and differences.

* * *

We begin our series of shared perspectives with the perspectives of Minalee Busi, looking at the Software and IT Services Industry.

Comments by Minalee Busi – G&A Sustainability Report Analyst-Intern

Discussion regarding sustainability reporting is usually more focused in context of resource intensive industries, and the Software and IT Services sector is often left out.

With sustainability being a major factor in competitive advantage and investor decision-making, Software and IT Services companies need to re-think their sustainability reporting strategies, if they are not already at that point.

SASB identifies a limited number of material issues for the industry for corporate reporting, such as:
• environmental footprint of hardware infrastructure,
• data privacy and freedom of expression,
• data security,
• recruiting and managing a diverse skilled workforce, and
• managing systematic risks from technology disruptions.

Environmental Disclosures

The disclosure suggestions set forth by both the SASB and GRI Standards are in fact quite comparable, and in alignment with each other for some topics.

For example, both standards suggest companies to report on the energy consumed (both renewable and non-renewable) — but with different reporting boundaries.

SASB suggests reporting consumption within the organization — and the GRI Standards ask to additionally include consumption outside of the company.

However, GRI Standards also include disclosures in terms of energy reduction due to conservation and efficiency initiatives — which SASB disclosures do not include.

Similarly, though both the disclosure frameworks require information about water withdrawal and consumption, GRI also expects detailed reporting on water discharge into different water bodies, with information such as whether water was treated before discharge and whether they follow international standards on discharge limits.

The GRI Standards also include disclosure on recycling — which although not very comprehensive, is completely non-existent in the SASB sector disclosure.

Given the increasing e-waste generated by the IT industry, both GRI and SASB could consider including more detailed disclosures in this area for addressing material risks companies face.

Addressing Data Security/Privacy

In terms of data security, both standards include suggestions of disclosures related to data breaches and the number of users affected. But since SASB disclosures are designed to be industry-specific standards, more detailed reporting requirements in terms of data privacy and freedom of speech are found in SASB — including information on secondary usage of user data and monetary losses as a result of legal proceedings associated with user privacy.

Other such additional detailed areas of sector-/industry-specific disclosures by SASB which are not specified in the GRI standards are topics under managing systematic risks — such as performance issues, downtime and service disruptions due to technological impediments; and, activity metrics related to data storage, processing capacity and cloud-computing.

Disclosures with respect to monetary losses due to legal proceedings around intellectual property protection and competitive behaviour can also be found in the SASB Standards.  These disclosures can be loosely be aligned with the GRI disclosures under non-compliance with laws in the socio-economic arena.

S/Social Reporting

With respect to the “S” (social domain) of corporate ESG reporting, both of the standards suggest reporting on employee diversity, with GRI focusing on categories such as age, gender and minority representation and SASB additionally suggesting reporting on data related to the percentage of employees who are (1) foreign nationals and (2) located offshore.

Interestingly, although SASB disclosures are industry specific standards and the IT industry is mainly dependent on human and intellectual capital, there is no specific suggestion of reporting on training and education of employees.

GRI Standards appear to be filling this gap with suggestions of detailed disclosures on average training hours, upskilling and transition assistance programs and information related to employee performance reviews.

Sustainability Reporting Criteria

The GRI Standards have extensive sustainability reporting criteria, of which a major portion of the disclosures fall under the “General Disclosures” — which include materiality, measurement approaches, consistency and comparability of reporting, external assurance, supply chain information, sustainability strategies, and ethics and integrity. This to me is seemingly more transparent as compared to the SASB Standards.

Another such area is stakeholder engagement, which exists in the SASB Standards only in the form of percentage of employee engagement.

The category of Discussion and Analysis under SASB Standards does require reporting on strategic planning about each of the material topics identified, which can be mapped to the Management Approach (DMA) disclosures recommended under each material Topic-specific disclosure area of the GRI Standards.

Alignment – and Gaps

With the above overview, the SASB disclosures and GRI Standards can be seen in alignment with respect to some material topics while having some gaps in others.

However, since both the standards are developed to address the needs different stakeholders – with GRI aiming a broader set of stakeholders and the SASB majorly targeting mainstream U.S. investors — they should not be seen by report preparers as being in competition with each other.

I believe that the efforts of the CDP and important sustainability reporting standards-setters such as GRI and SASB will certainly be welcomed by companies and other stakeholders now struggling to keep up, but the question remains if such collaborations can ultimately lead to the desired standardised sustainability reporting framework that many investors actively seek.

#  #  #

Note:  This commentary is part of a series sharing the perspectives of G&A Institute’s Analyst-Interns as they examine literally thousands of corporate sustainability / responsibility reports.  Click the links below to read the other posts in the series:

They Are Beginning Now – the Long-Awaited Corporate Disclosures on Ratio of CEO Ratio – CEO Pay-to-Median-of-Workforce Pay

by Hank Boerner – Chairman & Chief Strategist, G&A Institute

The big-deal and long-waited corporate announcements / disclosures are beginning in 1Q 2018. 

Way back when…after the 2008 financial crisis when the Dodd-Frank capital markets reform legislation was passed (in 2010)…one of the requirements was that public companies must develop a ratio and disclose this publicly: how much does the CEO earn, and what that is that compared to the median compensation of the employee workforce? (Half below/half above is the median level to be arrived in an analysis for public filing.)

This is the Ratio, CEO Pay-to-Median-Worker-Pay disclosures.

The Securities & Exchange Commission finally issued its guidance on all of this in September 2017 (companies and their trade associations had steadily pushed back on the 2010 disclosure mandate and the SEC struggled with the “how-to” rulemaking / or more “gentle” guidance, causing delays in applying the law).

So – today the CEO-Employee Pay Ratio is upon us – and the first important disclosures are coming out now – including the first filing for a S&P 100 firm.

Bloomberg Markets News reports that Honeywell International Inc’s filing shows that CEO Pay is 333 Times More Than Median Workers. CEO Darius Adamczyk’s pay package was $16.5 million in 2017; the median employee pay (for the company’s 130,000 workers) is $50,296.

The Honeywell CEO package for 2017 is 60% more than for the prior year (when he moved into the job).

Earlier this month Teva Pharmaceutical Industries disclosed a pay ratio of 302-to-1 ($19.4 million for the CEO, median worker $64,081).

The AFL-CIO projected a 347-to-1 ratio (CEO: $13.1 MM; workers, $37,000).

When the SEC guidance was firmed up in 2017, some market observers said this was a “local newspaper headline” and not something that serious investors would pay attention to.

The Los Angeles Times – both a regional newspaper and one with national reach and influence – now features this headline: “The First Official Report on CEO-Worker Pay Ratios Shows and Enormous 333-1 Gap at Honeywell”

LAT’s Pulitzer Prize-winning financial commentator Michael Hiltzik used words like “…obscene…raw figures…economic inequality…the 1%…telling…massively embarrassing..”

Sam Pizzigati, the prominent author and social commentator at the Washington DC think tank Economic Policy Institute, was quoted in the LA Times article:

“This is a confirmation of research done up to now,” Sam Pizzigati, a fellow at EPI, says of the Honeywell data. He expects some corporations to show much larger discrepancies. That could show up especially in the retail sector, where median earnings are likely to be well below the $50,000 level of Honeywell’s heavily professional workforce.

Walmart, for instance, says its average hourly pay for full-time workers was to reach $13.38, following a company-wide wage increase in 2016. That’s about $27,800. Its CEO, C. Douglas McMillon, was paid $22.4 million last year. That would create a ratio of about 805-to-1 based on hourly wages alone.

Bloomberg BusinessWeek writer Anders Melin published a piece in January – “Why Companies Fear Disclosing CEO-to-Workers Pay” — noting:

“U.S. companies must soon begin disclosing what many would rather keep secret: The ratio between the CEO’s compensation and the paycheck of the company’s median worker. The mandate was included in the 2010 Dodd-Frank Act to shed light on the growing income gap between executives and workers. Opponents say it’s only meant to embarrass executives and won’t be useful to investors. One critic called it an example of bigotry against the successful.”

And: The disclosures will provide a first-ever glimpse into how thousands of U.S. companies compensate their workers, plus a more accurate sense than ever before of the CEO-to-worker pay gap.

A year ago, Alex Edmans writing in The Harvard Business Review said “…the numbers are striking…the idea is that a high pay ratio is unfair…I strongly believe that executive pay should be reformed…[but] the pay ratio is a misleading statistic because CEOs and workers operate in very different markets…”

His commentary is at:

https://hbr.org/2017/02/why-we-need-to-stop-obsessing-over-ceo-pay-ratios
(He is a professor of finance at London Business School.)

Our new “G&A Institute’s To the Point!” management brief platform has background on the CEO-Worker Pay Ratio, published for guidance in September 2017 as the SEC published its guidance:

IT’S H-E-R-E NOW: SEC Guidance on CEO-Employee Pay Rule Clarified in Interpretive Guidance. Your Company Should Be Prepared for First Quarter 2018 Disclosures and Beyond!

The information is at:
https://ga-institute.com/to-the-point/its-h-e-r-e-now-sec-guidance-on-ceo-employee-pay-rule-clarified-in-interpretive-guidance-your-company-should-be-prepared-for-first-quarter-2018-disclosures-and-beyond/

I have a chapter in my book (“Trends Converging!) about the pay rule (Chapter 9) – the entire book is available for you with my compliments at:
https://www.ga-institute.com/research-reports/trends-converging-a-2016-look-ahead-of-the-curve.html

We’ll continue to bring you news of the CEO-Worker Pay Ratio corporate disclosures in 1Q 2018– company announcements and the public response to same.

SEC Proposes Important Amendments to Corporate Disclosure & Reporting – Changes Are in the Wind — But Corporate ESG Disclosure Is Not Addressed in the SEC Proposals …

October 12 2017 – by Hank Boerner – Chair, G&A Institute

On October 11, 2017 important news was coming from the Securities Exchange Commission (in Washington DC) for corporate leaders and investment professionals: a comprehensive package of proposed changes (amendments) to existing rules for corporate disclosure and reporting was released for public examination and comment.

There are more than 250 pages of proposed changes and adjustments released for your reading (the document will be published now in the Federal Register for broad communication to stakeholders).

You’ll remember the April 2016 activities as SEC released a 200-plus page Concept Release that addressed a range of issues that could result in revamping the overarching parts of Regulation S-K and parts of Regulation Fair Disclosure (“Reg FD“) and other corporate disclosures required by Federal statutes.

We told you about this in our post of May 13, 2016.
Link: http://ga-institute.com/Sustainability-Update//tag/sec-concept-release/

We said then: Maybe…U.S. Companies will be required…or strongly advised…to disclose ESG Data and related business information…

There were great hopes raised when the Commission in circulating the Concept Release document devoted more than a dozen pages to discussion about ESG, sustainable investing, the possibility of “guidance” or perhaps amending rules to meet investors’ expectations that public companies would begin, expand, improve on, ESG disclosure.

Numerous investor interests provided comments to the SEC in support of the possibilities raised by SEC in the dozen pages of the Concept Release devoted to ESG et al.

The US SIF — the Forum for Sustainable and Responsible Investing, a very influential trade association of asset owners and managers — provided important input, as did the CFA Institute (the U.S.-based, global certification organization for financial analysts and portfolio managers worldwide).

Disclosure of material ESG issues was a key concern of the numerous responders in the public comment period.

This week’s development: The SEC Commission proposed amendments to existing regulations that are part of the “Modernization and Simplification of Regulation S-K,” citing a different package of legislation. (The FAST Act Modernization, which in part will the sponsors said will attempt to “prune the regulatory orchard” — this is part of the Fixing America’s Surface Transportation Act or “FAST”.)

The Commission referred to the proposals as an important step “…to modernize and simplify disclosure requirements for public companies, investment advisors and mutual fund (investment) companies under the FAST Act…”

This, said recently-appointed SEC Chair Jay Clayton, “…is the most effective way to update SEC rules, simplify forms and utilize technology to make disclosure more accessible…”

The proposed amendments were characterized as part of the overall, long-term review of the SEC’s disclosure system. Thus, the SEC said the proposed amendments reflect “perspectives developed during the staff’s broader review…including public input on the prior Concept Release.

The details are available for you in a new 253-page document, at: https://www.sec.gov/rules/proposed/2017/33-10425.pdf

You have 60 days of open comment period ahead during which to express your views on the proposals.

The proposed amendments mostly address corporate governance (G”) issues that if adopted would:

• Change such items as Description of Property**; the MD&A; Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act; Outside Cover Page of the Prospectus.

• Revise rules and forms to update, streamline and improve the SEC disclosure framework by eliminating risk factor examples listed in the disclosure requirement and revising the description of “the property requirement” to emphasize the materiality threshold**”.

Note that while “property” is usually a facility, this does not always apply to the service sectors.

• Update rules as needed to reflect changes since the rules were first adopted or last amended. (Including, “corporate governance” items, such as for Board Auditing, Compensation Committee operations.)

• Simplify the overall disclosure process, including treatment of confidential information; also, changes would be made to the MD&A to allow for “flexibility in discussing historical periods”. (The discussion on confidential info runs for pages – important to read for corporate managers involved in disclosure.)

• Treatment of subsidiaries.

• Incorporate technology to improve access to information requiring data tagging (XBRL) for items on the cover page and use of hyperlinks (HTML) by reference and in the EDGAR system.

Again – the public now has 60 days to submit comments on the proposed amendments (to such statutory authority as the Securities Act of 1933; Securities Exchange Act of 1934; Investment Company Act of 1940; and, regulations under these landmark securities protection laws of the land).

There are numerous sections within the proposed amendment document where the Commission is inviting public comment. To submit your comments, see: http://www.sec.gov/rules/proposed.shtml — file#S7-08-17

Disappointing News: There is no mention that we could find in the proposal document that addressed the many comments that were directed to the SEC staff in response to the earlier Concept Release by sustainable & responsible investor interests. And, in many investor conversations with SEC staff that acknowledged the growing importance of disclosure regarding corporate sustainability and ESG performance.

No mention of: Climate Change. ESG. Responsible Investment.

This is very troubling — no doubt members of the investment community and corporate leaders well along on their sustainability journey will be providing their perspectives to SEC — and the media, and elected officials — on this important oversight.

SEC guidance for corporate reporters regarding their ESG, sustainability, responsibility, citizenship, etc disclosures and reporting activities would be very helpful – right?  Of course, we are in a new political environment now, and perhaps that is helping to shape the agenda at the Commission as “reforms” are drafted and distributed for public consumption.

There is much more news to come when the response to the announcement begins. Stay Tuned!

P.S. – if you/your organization responds to the draft proposals, please do let G&A know so we can publicize your perspectives.